[Guest Post] How to start drafting an agreement?

This post has been contributed by Mr Bhumesh Verma. He is the managing partner of Corp Comm Legal, which he set up after spending 23 years with some of the best Indian law firms. He is a law graduate from Delhi University and also a Chevening Scholar. Mr Verma is experienced in corporate and commercial matters, M&A, FDI, financial and technical collaborations, private equity, venture capital, due diligence, regulatory and strategic advice. He has been recognised among India’s Top 100 Lawyers by the Indian Business Law Journal.

In this post Mr. Verma provides essential insights as to how to start drafting an agreement.

Before one gets to start drafting an agreement, the parties to a contemplated transaction must decide as to who will draft the agreement. Usually, parties are hesitant to discuss this. It is somehow assumed that the bigger party (older and more established) will issue the first draft and the other(s) will provide their inputs or suggestions if any.

If your client has an upper hand and negotiation leverage, invariably you will be asked to draft. Customs and practice also have their hand in such matters. Mostly, the party which has the financial muscle power or whose money, property, technology, etc. are at stake would like to keep the drafting keys for itself and let the other party only make comments on the draft.

For example, you may have noticed that:

  • the employer always issues the employment letter/agreement;
  • the bankers always provide a draft of the loan agreement;
  • in a technology license agreement, the licensor will provide the draft;
  • all the software license agreements are drafted by the service providers.

The above are only a few examples.

If however, there is an option for your client to take responsibility for drafting an agreement, you should advise your client to go ahead. If drafted and negotiated properly, your client is likely to get the first mover advantage.

This way, your client not only gets a clean slate or a big canvas to incorporate the provisions which have already been discussed and agreed, but also incorporate issues that are most relevant to it but may not have been discussed so far. You could keep your clients’ concerns and interest in mind and draft the terms in a way that brings advantages to your client without changing the basic terms of the ‘handshake’ deal. As said earlier, you have a clean slate so you can write as much relevant stuff as you want to.

If you have drafted comprehensively incorporating all the concerns and benefits of your client, the other party or their lawyer may or may not be questioning all of them. For the ones where questions are raised, the other party has to justify its objections and negotiate deletion or dilution thereof. Even if negotiation results in some deletions or dilutions, your client would be in a good position.

Compare this with the opposite scenario. If the other party sends you a draft, you have to discuss it with your client, find gaps and negotiate addition of your client’s (missing) issues in the draft.

Out of the two, which situation is better?

A great cricket legend once said,”If you do not know how the pitch will behave and you win the toss, always opt for bating.” It is the same with drafting. Given an option, you should draft, rather than vet the other party’s draft.

You must make a laundry list of the information that is absolutely necessary for you to know to draft an agreement. This should, inter alia, include:

  1. Particulars of parties;
  2. Description of the transaction;
  3. Reason why the parties are entering the transaction;
  4. Consideration – Money and Services involved;
  5. Duration of the Agreement, Renewal or Extension;
  6. Termination situations;
  7. Time Lines; and
  8. Dispute Resolution

You should ask your client to provide you basic information regarding the above as soon as you are approached to draft a particular agreement.

Before processing the information, you should understand the fact that your first and foremost focal point has to be your client. An agreement is never created in a vacuum – it has to be formulated around the client, his requirements, and expectations. You should first make the client comfortable enough to share all that is necessary for you to know and his own insights and expectations – else you will bake something on half-truths or incomplete information. You must assess as to what are the client’s goals and standards of expectation from the transaction, how critical is it for the client – whether it is a one-off, one of several projects the client is undertaking or is it the most ambitious project the client has envisaged so far. Identify the deal breakers – check as to what tolerance limits your client is fine with.

Additionally, an agreement does not affect only your client, but the other party as well as third-party beneficiaries (sometimes even general public as consumers of certain products/services) in certain cases. You must, therefore, be cognizant of their concerns as well. It is good trying to put yourself in the other concerned parties’ shoes sometimes. You will draft much better that way.

If the parties have executed any document whatsoever earlier, be it Heads of Agreement, Memorandum of Understanding (“MOU”), Letter of Intent (“LOI”), Non-Disclosure Agreement (“NDA”), etc. (let us say a preliminary document for ease of reference here), ask for a copy thereof.

Your draft definitive agreement must incorporate all substantial and relevant provisions of any preliminary document. The preliminary documents are generally non-binding till the execution of a definitive agreement, barring exclusivity, confidentiality, governing law, etc. and there is always scope for negotiation and discussion.

If the parties are to deviate from any understanding in the preliminary document, it is their call and they have to inform you regarding the change in their understanding of any aspect. You should not assume or incorporate any changes in their initial understanding on your own. However, you can suggest some changes if something incorporated in the preliminary document is not legal, feasible or practical.

Sometimes, the legal or business position undergoes a change between the execution of a preliminary document and the definitive agreement – a legislation could get repealed, repealed or amended or a party’s business is restructured into different entities. You should weigh the resultant implications, apprise the clients of such changes, and suggest a suitable alteration in the agreed position of the parties on the subject matter.

When you start incorporating this information in the draft, many questions would arise in your mind about the parties’ expectations and viewpoint on other items. Enlist them and seek clarity/ information/confirmation from your client.

Ideally, you should try not to bother your client for supplementary information more than twice or thrice before sending him the first draft. Else, the client will feel irritated about your piecemeal approach and frequent messages in this regard.

Draft a first cut (whether afresh or using a precedent) on the basis of preliminary information provided by the client. In case any information is not provided by the client in the first instance or which comes later to your mind while drafting the agreement, draft suitable clauses and leave blanks indicating the relevant parties to fill in.

The first cut should be drafted with an outlook that this agreement should be an efficient mechanism to work properly during its term and dynamic enough to be fairly amended or terminated, if need be as and when required to take care of the changed facts and circumstances without causing any allegations of foul play.

You may also fill in any missing information on the basis of legal requirements, market practice or your experience on similar agreements by way of suggestion, specifically highlight such suggestions and ask the client to confirm in this regard. The final call in this regard should lie with the client unless it is illegal or impractical!

This post first appeared here.

L&P Editorial Team

The Law & Practice Blog's editorial team.

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